U.S. Non-Residential Construction Decline An Important Economic Indicator

Anirban Basu wants the public to pay more attention to U.S. non-residential construction. “These non-commercial projects are how countries are judged,” he said, during our recent conversation about how non-residential construction, anything that is not housing, which includes roads, schools, hotels, and commercial properties, can be used as an economic indicator. “Look at China. They are adding to their infrastructure by investing in roads, bridges and municipal projects. We recognize it for what it is when we see this in other countries. It is a clear reflection of progress.” But what about America?

Basu is Associated Builders and Contractors’ (ABC) chief economist. He provides ABC members with timely, comprehensive analysis on important trends in the U.S. commercial and industrial construction industry. Every month the ABC puts out their Construction Backlog Indicator (CBI) which is based on a monthly survey of various ABC members and measures work to be performed by contractors to assess the health of the construction industry.

The CBI is down 26 percent since its peak in 2008, which should come as a surprise to exactly no one. “Privately funded construction dried up almost right away during the financial crisis,” explained Basu. What might be surprising is why it isn’t down further; the 2009 government stimulus package is bolstering this sector, and the money is about to run out. The stimulus funds will be completely gone by 2012.

In the next few years, Basu believes the outlook for non-residential construction is not good. Because the markets are not fully healed, not completely ready, the ball will be fumbled. The recovery, which he believes will be mirrored by residential construction’s rebound, will move forward like this: there will be a continuing steady and ongoing decline into the fall of 2011, followed by gradual stabilization in 2012 and a noticeable but cautious rebound in late 2013, early 2014.

For America to be able to invest in its own infrastructure again, to keep those endless ribbons of highway we are so known for in good repair, and to build new ones, there will need to be some fundamental financial changes. Right now, economic realities will not allow the investment in levees, bridges, roads, schools and prisons that we need. Some of these types of projects have been privatized, particularly schools and prisons. Indeed, per the CBI, public non-residential construction inched up 0.2 percent for the month, but was down 2.3 percent year-over-year. “The expectation is that privately financed construction volumes will continue to rebound gradually into the summer even as certain publicly financed construction segments, such as public safety and education, will experience diminished spending,” said Basu.

Currently state and local governments are backing off of large construction projects, which is not surprising. Because the controversial stimulus funds are about the run out, the government, at federal, state and local levels, will need to find a new way to fund projects that help keep America running smoothly.